Can I Discharge My PPP Loan in Bankruptcy?

Many sole proprietors in Oak Park and throughout Illinois receive Paycheck Protection Program loans, or PPP loans, in the first few months of the COVID-19 pandemic. Those PPP loans were issued with a possibility of forgiveness in the future if businesses that received the loans used them in particular ways required by the U.S. Small Business Administration (SBA). The PPP loan program has opened again, and sole proprietors and other small business owners were specifically eligible for loans—before larger businesses—between February 24 and March 9, 2021. According to an article in Quartz, the SBA also issued a new rule that ultimately allows sole proprietors and freelancers to obtain larger PPP loans because it “allows entrepreneurs without employees to calculate their loan eligibility using gross income rather than net income, making the loans far more generous, especially for businesses with little or no profit.”

What happens when a sole proprietor cannot repay the PPP loan and cannot qualify for forgiveness? Can the loan be discharged through a bankruptcy filing? In short, the answer is likely “yes,” but the sole proprietor will need to file for consumer bankruptcy.

Why Sole Proprietors Must File for Consumer Bankruptcy Instead of Business Bankruptcy

When you own a business as a sole proprietor (i.e., when your business is structured as a sole proprietorship) and need to consider bankruptcy, it is critical to understand that you cannot file for business bankruptcy. Rather, you will need to file for personal bankruptcy in order to have your business debts discharged.

Why does the bankruptcy process work this way for sole proprietors running sole proprietorships? This type of business structure is really the only kind in which the business is not separate from the owner. To be sure, the owner of a sole proprietorship is accountable for the debts of the business, and the business debts are, in effect, the consumer debts of the sole proprietor. There is no formal distinction for financial and legal purposes between the sole proprietor and the business when it comes to business debts and accountability. For all intents and purposes, the business owner is the sole proprietorship, and vice versa. But there is good news about PPP loan debt for sole proprietors: That debt likely can be discharged in a consumer bankruptcy case.

PPP Loan Debt is Likely Dischargeable

PPP loans are unsecured loans, which means there is no collateral attached to the loan. While PPP loans also do not require a personal guarantee (unlike some Economic Injury Disaster Loans, or loans through the EIDL program), sole proprietors should understand that they have, in effect, provided a personal guarantee for the loan due to the structure of a sole proprietorship that we discussed above.

Yet sole proprietors likely will be eligible to discharge PPP loan debt by filing for bankruptcy. How quickly the PPP loan debt will be discharged will depend on various factors, including the type of bankruptcy.

Contact an Oak Park Bankruptcy Lawyer

Whether you are planning to file for a Chapter 7 bankruptcy or a Chapter 13 bankruptcy, one of our experienced Oak Park bankruptcy attorneys can help. Contact the Emerson Law Firm today for more information.


See Related Blog Posts:

Can I Discharge COVID-19 Medical Debt in Bankruptcy?

Will I Have to Turn Over My Cell Phone in a Chapter 7 Bankruptcy?

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